More expectations for lending rate cuts

Inflation fell for the eighth consecutive month to its lowest level in almost two years in February, paving the way for fresh interest rate cuts.

Encouraged by falling inflation rates, the Central Bank has cut prime interest rates twice in a row since November, in what analysts said is a clear shift towards focusing on growth. The most recent cut in February was by a larger-than-expected 200 basis points to 16.0 percent.

Although businesses are happy with developments in the economy, they are worried about the slow rate at which government’s risk-free paper, the Treasury-bill, is falling - making it remain attractive to lenders.

The benchmark 91-day Treasury-bill rate, which was 25 percent in October last year, fell to 17.44 percent in mid-February and further to 15.93 currently, based on the latest auction results; but analysts still think that the rate must go down to free credit for the private sector.

Annual inflation has dropped to a near two-year low of 14.23 percent in February, due in part to tight fiscal and monetary policies and an appreciation of the cedi against other currencies. It had been stuck at 20 percent in the middle of 2009.

The outlook, as assessed by the Bank of Ghana (BoG), points to lowering inflationary risks - an indication that the real value of money will have to continue rising for banks to become more willing to reduce their lending rates.

It was based on this favourable outlook that the Monetary Policy Committee (MPC) of the BoG recently cut its policy lending rate from 18.0 percent to 16.0 percent.

Some banks responded to the February rate cut by downward revisions in their base lending rates, except that businesses still complain because of the high margins on the base rates.

Official figures released by the Ghana Statistical Service (GSS) named recreation and culture, furnishing, household equipment, and health as the main movers of the decrease in the non-food component which contribute 55.09 percent to the national consumer basket.

Meanwhile, in the food group sugar, jam, honey and syrup recorded high inflation rates with fruit recording a negative inflation rate during the month under review.

Magnus Ebo Duncan, Director of Economic Statistics Department, GSS, announcing the figures at a media briefing in Accra said: “inflation in the non-food group has had a major influence on the overall rate of inflation.”

He explained that stability in the exchange rate and import prices has also contributed to the decline for the month of February, adding that the inflation rate may continue to fall if government continues with its stabilisation and fiscal discipline policies.

The rate of inflation, which stood at 18 percent in October 2009, declined to 16.9 percent in November and then to 15.9 percent in December 2009.